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Elasticity . . .
is a measure of how much buyers and
sellers respond to changes in marketconditions
allows us to analyze supply anddemand with greater precision.
Journal Question-Name 3 necessities and3 luxuries that you would buy.
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Computing the Price Elasticity
of Demand$he price elasticity of demand is computedas the percentage change in the !uantitydemanded di"ided by the percentagechange in price.
rice %lasticity & ercentage 'hange in Qd(f )emand ercentage 'hange in rice
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Elasticity, Percentage Changeand Slope
*ecause the price elasticity ofdemand measures how much
!uantity demanded responds tothe price+ it is closely related tothe slope of the demand cur"e.
*ut instead of looking at unitchange+ elasticity looks at
percentage change. ,hat do wemean by percentage change
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Brief Assessment on
Percentages#f there are / tomatoes in a store and youpicked 01 of them+ what percentage of the total
did you pickaul used to weigh 2// lbs last year+ but now he
only weighs 0 lbs. 4ow many lbs did he lose,hat is the percent change of the loss
,hat is the a"erage of 3// and 33/ ,hat isthe midpoint
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Computing the Price Elasticity
of Demand
priceinchange Percentagedemanded quatityinchange Percentage
demand of elasticity Price =
%xample5 #f the price of an ice cream cone increasesfrom 62.// to 62.2/ and the amount you buy falls from0/ to 7 cones then your elasticity of demand would becalculated as5
2 percent10 percent20
100
002
002202
10010
810==
.
)..(
)(
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Computing the Price Elasticity ofDemand Using the idpoint
!ormula
$he midpoint formula is preferable when
calculating the price elasticity of demandbecause it gi"es the same answer regardlessof the direction of the change.
)/ 2]P)/ [(PP(P)/ 2]Q)/ [(QQ(Q
=Demandof ElasticityPrice1212
1212
+
+
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Computing the Price Elasticity
of Demand
%xample5 #f the price of an ice cream cone increasesfrom 62.// to 62.2/ and the amount you buy falls from0/ to 7 cones the your elasticity of demand+ using themidpoint formula+ would be calculated as5
32.25.9
22
2/)20.200.2(
)00.220.2(2/)810(
)810(==
+
+
percent
percent
)/ 2]P)/ [(PP(P)/ 2]Q)/ [(QQ(Q
=Demandof ElasticityPrice1212
1212
+
+
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Perfectly Inelastic Demand
# Elasticity e$uals %
Quantity
Price
4
$5
Demand
1002. ...leaves the quantity demanded unchanged.
1. Anincreasein price...
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Inelastic Demand
# Elasticity is less than &
Quantity
Price
4
$51. A 25%increasein price...
Demand
10002. ...leads t! a 10% decrease in quantity.
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Unit Elastic Demand# Elasticity e$uals &
Quantity
Price
4
$51. A 25%increasein price...
Demand
100"52. ...leads t! a 25% decrease in quantity.
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Elastic Demand# Elasticity is greater than &
Quantity
Price
4
$51. A 25%increasein price...
Demand
100502. ...leads t! a 50% decrease in quantity.
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Perfectly Elastic Demand# Elasticity e$uals infinity
Quantity
Price
Demand$4
1. At any pricea#!ve $4 quantity
demanded is er!.
2. At e&actly $4c!nsumers 'ill#uy any quantity.
(. At a price #el!' $4
quantity demanded is in)inite.
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Determinants of
Price Elasticity of Demand
Necessities versus Luxuries
Availability of Close ubstitutes
Definition of the !ar"et
#ime $ori%on
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Determinants of Price
Elasticity of Demand)emand tends to be more inelastic
#f the good is a necessity.
#f the time period is shorter.$he smaller the number of close substitutes.
$he more broadly defined the market.
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Determinants of
Price Elasticity of Demand Demand tends to be more elastic &
if the good is a luxury.
the longer the time period.
the larger the number of closesubstitutes.
the more narrowly defined the market.
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Elasticity and 'otal "e(enue
$otal re"enue is the amount paid bybuyers and recei"ed by sellers of a good.
'omputed as the price of the good timesthe !uantity sold.
TR = P x Q
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$4
Demand
Quantity
P
0
Price
P x Q = $400 *t!tal revenue+
100Q
Elasticity and 'otal "e(enue
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'he 'otal "e(enue 'est for
Elasticity
#N%89:$#')%;9N)
%89:$#')%;9N)
)ecrease inrice
%89:$#')%;9N)
#N%89:$#')%;9N)
#ncrease inrice
)ecrease in$otal
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An E)ample of an Inelastic
*ood(il and (il rices$his "ideo will show
the supply side issueswith getting oil out ofthe ground.$hen the "ideo willfocus on the demand=us>? issues of usingoil.
#nsert %conomics @ideoAile 0 and play 9rab (il
clip.
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Income Elasticity of Demand
#ncome elasticity of demand measureshow much the !uantity demanded of a
good responds to a change in consumersBincome.
#t is computed as the percentage change
in the !uantity demanded di"ided by thepercentage change in income.
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Computing Income Elasticity
IncomeElasticity
of Demand
Percentage Changein Q antity
DemandedPercentage Change in Income
=
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Income Elasticity
# 'ypes of *oods # Normal 'oods
#ncome %lasticity is positi"e.
Inferior 'oods#ncome %lasticity is negati"e.
4igher income raises the !uantity demandedfor normal goods but lo(ers the !uantity
demanded for inferior goods )
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Cross Price Elasticity of
Demand%lasticity measure that looks at theimpact a change in the price of one good
has on the demand of another good.C change in demand Q0DC change inprice of Q2.
ositi"e-:ubstitutesNegati"e-'omplements.